Personal Income Tax, Small Business

Finalizing Your 2013 Income Taxes

Keep complete records and make use of all your eligible deductions.

Instead of thinking just about paying off your credit cards, it might brighten your day a bit to think about deductions available to you this year and in future years to reduce the amount of personal income taxes you have to pay.

To understand how deductions work, take a look at the CRA’s T1 General form available online at the CRA’s website. Lines 101 to 150 are used to list and tally your various types of income. Line 150 shows your total income. Lines 206 to 233 list and calculate the deductions you can make to reduce your total income to get your net income (Line 236). Lines 244 to 257 list and total other types of losses and deductions to give your taxable income (Line 260). Because the deductions available between lines 206 and 260 reduce your total income dollar for dollar, they can have a significant impact on the amount of your taxable income.

If you think you can claim any of the following deductions, make sure you have all the supporting documents. Talk with your tax professional to make sure you are keeping everything you will need in the case of an audit. You usually do not have to send documents with your tax filing, but you will certainly need them if the Canada Revenue Agency (CRA) questions your claims.

Interest Expense

Interest expense incurred to earn interest income, dividends or royalties, or for an investment in a limited partnership or a partnership in which you are not an active partner, is deductible. Expenses associated with interest income include investment management fees, and accounting and investment counsel fees. (Note that, as of 2013, the safety deposit box rental fee is no longer deductible.)

Employment Expense

Employment expenses, other than those included on a T777 Employment Expenses Workchart or the TL2 Claim For Meals and Lodging Expenses, that may be overlooked because they are not listed on a T4 include:

  • repayment to the Workplace Safety and Insurance Board
  • power saw expenses
  • legal or extrajudicial fees incurred to recover pay or wages or repayment of salary or wages

Union dues are often overlooked, especially if they are not deducted at the source. In addition to union dues, mandatory premiums for professional liability insurance are also a direct deduction as are professional fees. If professional fees or union dues are paid for by an employer, the employee should not deduct the expense unless the amounts paid are included as earned income.

Moving Expenses

If you had moving expenses in prior years that were not completely utilized, they may be carried forward and deducted in the current year. Appropriate documentation must be available to complete the Moving Expenses Deduction form.

Support Payments

Support payments to a former spouse under the terms of a separation or divorce agreement are a direct deduction from total income. Arrears paid in the current year are also deductible. Anyone receiving support payments must claim them as income. Spousal support payments must not be confused with child support payments, which are not a deduction from total income. Child support payments are not taxable in the hands of the recipient because they are payments solely for the benefit of the dependent child.

Child support payments are not taxable in the hands of the recipient.

Deduction for Split-Pension Amount

This deduction allows a pensioner to transfer a portion of their pension income to their spouse and thereby reduce the pensioner’s taxable income. When the pensioner’s spouse has taxable income significantly lower than that of the pensioner, the tax savings can be significant. Computing the optimum allocation between the spouses necessitates a number of different calculations best done by a tax professional.

Registered Retirement Savings Plan

Ensure you include RRSP receipts for contributions made from March 2, 2013, to December 31, 2013, as well as those contributions for the period January 1 to March 3, 2014. For those employees who contribute to a company pension plan, the RRSP amount will be reduced. Once again, it is best to seek professional guidance to ensure overcontributions do not create unnecessary tax liabilities.

Disabilities

Deductions are allowed for expenses incurred as a result of a physical or mental impairment so long as they were not also claimed as medical expenses or recovered from an insurance claim. These deductions must be claimed in the year the expense was paid. The expenditures must have been incurred to earn income as an employee, self-employed person or partner, to do research or similar work for which a grant was received, or to attend a designated education institution or secondary school. Be sure the impairment for which the expenses are claimed falls within definitions laid out by the CRA. Since there is a high probability that taxpayers making these claims may be audited, be sure that all the figures supplied to the CRA are supported by the proper documentation. (It is not necessary to file the data when filing the tax return.)

Child Care Expenses

There are maximum deductions depending upon the age of the child, the number of weeks at school or summer camp and the earned income of the taxpayer claiming the deduction. So, be sure your child care receipt indicates the amount paid and the number of weeks for each child. Individuals filing for child care expenses must also provide the Social Insurance Number, name of the individual or company providing the service and specify the type of service.

Specialized Areas

Some specialized deductions come from forms supplied by employees, the government, educational and financial institutions. Others, often of a one-time nature, need to be drawn to your tax preparer’s attention. For instance, legal fees incurred to collect support payments or to appeal an income tax assessment of previous years should be brought forward. If you have incurred unusual expenditures in the past year, assemble all the documents and discuss the matter with your tax preparer.

Tax Credits

Deductions, such as medical expenses, create tax credits that are deducted from taxes payable. These tax credits are usually a percentage of the total expenditure incurred and, although helpful in reducing your tax payable, their omission in many instances will not have the same dollar savings as the deductions indicated above.

Perhaps the best known of the deductions subject to the tax credit calculation is tuition fees. If, for example, tuition fees and the accompanying education and textbook amounts totalled $10,580, this amount would be subjected to a 20% (Federal and Ontario) tax credit resulting in a reduction of tax payable approximating $2,121. In comparison, if the $10,580 had been an RRSP contribution, the entire amount would have been applied against total income. Assuming for a moment that a taxpayer is in a 30% tax bracket, the RRSP contribution creates a $3,174 tax reduction.

Keep Good Records

Taxpayers have a responsibility to themselves to pay the minimum income tax required by law. Retaining a complete record of income and expenditures to support your claims plus regular consultations with your tax advisor is the best way of keeping as many of your hard-earned dollars as possible.


The preceding article is reprinted from the February 2014 newsletter Business Matters with the permission of the Canadian Institute of Chartered Accountants.  Business Matters is a bi-monthly newsletter, the full version of which can be obtained on request. 

This post deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

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